SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Rel. No. 8641 / December 2, 2005
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 52875 / December 2, 2005
Admin. Proc. File No. 3-11462
In the Matter of
OPINION OF THE COMMISSION
Grounds for Remedial Action
Attorney who acted as bond counsel for school district violated antifraud provisions by
negligently rendering unqualified opinion that interest on notes issued by school district
would be exempt from federal income taxation, and representing that the proceeds would
be used for school renovation and construction projects. Held, it is in the public interest
to order the attorney to cease and desist from violating Sections 17(a)(2) and 17(a)(3) of
the Securities Act of 1933 and to pay disgorgement of $9,509.63, plus prejudgment
David J. Hickton, of Burns, White & Hickton, LLC, for Ira Weiss.
Arthur S. Gabinet, Christina Rainville, and Mark R. Zehner, for the Division of
Appeal filed: March 18, 2005
Last brief filed: June 10, 2005
The Division of Enforcement appeals from an administrative law judge's decision
dismissing this proceeding against Ira Weiss. Weiss served as bond counsel for the Neshannock
Township School District ("School District"), of Lawrence County, Pennsylvania, in connection
with the School District's issuance of $9.6 million in three-year general obligation notes (the
"Notes") to fund capital improvement projects. The Notes were offered and sold to investors in
June 2000 based on Weiss's unqualified opinion that the interest on the Notes would be exempt
from federal income taxation, and on a representation that the proceeds would be used to finance
projects. The Division alleged that Weiss violated Section 17(a) of the Securities Act of 1933, 1/
Section 10(b) of the Securities Exchange Act of 1934, 2/ and Exchange Act Rule 10b-5, 3/ by
making material misrepresentations and omissions about the proposed use of the Note proceeds
and the risk that the interest on the Notes would be taxable. The Division also alleged that Weiss
caused the School District to violate those antifraud provisions. 4/ We base our findings on an
independent review of the record, except with respect to findings not challenged on appeal.
The School District is located in New Castle, Pennsylvania, approximately eighty miles
north of Pittsburgh. The School District is governed by a Board of School Directors ("Board"),
composed of nine unpaid members elected by the citizens of Neshannock Township for four-year
terms. The Board hires several officials, including a superintendent, business manager, and
solicitor, to administer the school system. The superintendent, as the School District's chief
executive officer, is responsible for all aspects of school operations. The School District operates
one elementary school for grades kindergarten through six and one junior/senior high school for
1/ 15 U.S.C. § 77q(a).
2/ 15 U.S.C. § 78j(b).
3/ 17 C.F.R. § 240.10b-5.
4/ The School District consented, without admitting or denying the findings, to the entry of a
cease-and-desist order in which the Commission found that the School District recklessly
violated the antifraud provisions in connection with the Notes' issuance. Neshannock
Township School District, Securities Act Rel. No. 8411 (Apr. 22, 2004), 82 SEC Docket
2718. The School District also agreed to pay disgorgement, plus prejudgment interest, in
the amount of $28,904.
grades seven through twelve. The elementary and junior/senior high schools are housed in the
A. School District's Construction Projects
Since at least early 1999, the School District recognized that the portion of the building
housing the elementary school had multiple physical and mechanical deficiencies and needed
substantial repairs and renovations. 5/ The School District was also considering the idea,
referred to as the "middle school concept," of separating students in grades six through eight and
constructing a new middle school facility to serve them. In July 1999, Eckles Architecture, a
New Castle firm, submitted a report detailing the costs associated solely with the elementary
school repairs and renovations. The report estimated nearly $5 million in costs.
In the summer of 1999, the School District hired a new superintendent, Dr. Ronald
Mento. Mento had been superintendent of the Duquesne City School District in Duquesne,
Pennsylvania. When Mento was hired, the Board told him that the School District would be
involved in school construction projects, and that part of his duties would be to ensure that the
elementary school and other areas of the building were improved. By then, School Board
President Harry Flannery ("President Flannery") testified, the Board believed that the elementary
school repairs and renovations, coupled with the construction of a new middle school, would cost
in the "ball park" of $9 or $10 million.
With Mento installed as superintendent, the planning continued on the various projects.
The minutes of a December 1999 Board meeting stated that the School District was "in the
process of putting together ideas and looking at renovations and updating the Elementary School,
fixing the roof at both schools and the bus garage. A middle school concept [was] also being
explored." A "wish list" of projects that included the elementary school repairs and renovations
as well as other options was compiled in February 2000. However, as of that time, there was no
consensus among the Board members on whether to proceed with any projects.
In Pennsylvania, a school district's major construction projects, i.e., a new school
building or building renovation, are eligible for state reimbursement. Reimbursement requires
state approval, a feasibility study, including enrollment projects, and public hearings. The
School District had only a preliminary demographic report before the Note closing. In April
5/ In August 1998, the School District received a report evaluating the elementary school's
electrical and mechanical systems, roofs, and other structures. That report estimated over
$1 million in needed repairs.
2000, the Board announced that public hearings would be held before any final decisions on the
projects were made. 6/ No public hearings were held before the Notes were issued in June 2000.
B. Shupe Presents Financing Proposal to School District
In or about May 2000, the School District began to consider issuing tax-exempt securities
to finance its construction projects. 7/ Around this time, L. Andrew Shupe II, who was president
of Quaestor Municipal Group, Inc., a registered broker-dealer, read in the local newspapers that
the School District was contemplating projects. 8/ Shupe contacted Mento and proposed that the
School District issue a three-year note in order to fund its projects and make additional money by
investing the Note proceeds that were not immediately being used for projects. 9/
Shupe also contacted his friend, Weiss, a Pittsburgh attorney listed in the "Bond Buyer's
Municipal Marketplace" (the "Red Book") of experienced counsel. Shupe had worked with
Weiss on more than twenty municipal bond transactions, and had referred bond counsel matters
6/ Board member Gina Hennon stated that the Board was responding to concerns from
citizens who "heard that we [the Board] were going to build a middle school, and they
were very upset about it." According to Hennon, the Board sought to "reassure" citizens
that "this was a process, and that part of that process would be a public hearing with an
opportunity for [their] input."
7/ Tax-exempt municipal securities typically have lower interest rates than taxable
securities. Investors accept those lower interest rates because they will not be taxed at the
federal level on the income received. See 26 U.S.C. § 103(a) (providing that gross
income generally does not include interest on state or local bonds).
8/ Shupe was named as a respondent in this proceeding, but entered into a settlement with
the Commission. Shupe consented, without admitting or denying the findings, to the
entry of a cease-and-desist order in which the Commission found that Shupe willfully
violated Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act
Rule 10b-5, and willfully aided, abetted, and caused the School District's violations of
those provisions. The Commission also barred Shupe from association with any broker
or dealer, and ordered him to disgorge $15,043, plus prejudgment interest. L. Andrew
Shupe II, Securities Act Rel. No. 8459 (Aug. 24, 2004), 83 SEC Docket 2113. However,
it waived Shupe's payment of disgorgement and prejudgment interest, and did not impose
a penalty against him, based on his sworn representations in his Statement of Financial
Condition, as updated, and other documents submitted to the Commission. Id.
9/ Mento and Shupe had previously worked together on a Duquesne City School District
bond offering. When Mento was superintendent of that district, Weiss had been its
solicitor. Mento was not called as a witness at the hearing.
to Weiss in the past. Shupe testified that he "offered the deal" to Weiss if Weiss "felt
comfortable" writing the bond opinion. Shupe told Weiss that, if he did not write the bond
opinion, Shupe "could get it done elsewhere." Weiss replied that he would get back to Shupe.
C. Requirements for Three-Year Tax-Exempt Municipal Securities
Applicable Treasury regulations provide that a local government entity such as a school
district may issue up to $10 million in tax-exempt securities, including notes, and invest the
proceeds in higher yielding investments for up to a three-year period, without the notes being
considered arbitrage notes, 10/ if, and only if, the issuer reasonably expects to satisfy three tests,
known as the expenditure, time, and due diligence tests. "The expenditure test is met if at least
85 percent of the net sale proceeds of the issue are allocated to expenditures on the capital
projects by the end of the 3-year temporary period." 11/ "The time test is met if the issuer incurs
within 6 months of the issue date a substantial binding obligation to a third party to expend at
least 5 percent of the net sale proceeds of the issue on the capital projects." 12/ "The due
diligence test is met if completion of the capital projects and the allocation of the net sale
proceeds of the issue to expenditures proceeds with due diligence." 13/
The determination of whether an issuer satisfies the expenditure, time, and due diligence
tests is based on its reasonable expectations as of the issue date of the notes. 14/ The issuer's
expectations are considered reasonable only if a prudent person in the same circumstances would
have the same expectations based on all the objective facts and circumstances. 15/ If any one of
the tests is not met, and the issuer earns arbitrage profits, the notes lose their tax exemption, and
note purchasers may be required to pay tax on the interest earned on those notes.
10/ See 26 U.S.C. § 148(a) (defining "arbitrage bond" as any bond issued as part of any issue
any portion of the proceeds of which is to be used, directly or indirectly, to acquire higher
yielding investments or to replace funds which were so used).
11/ 26 C.F.R. § 1.148-2(e)(2)(i)(A).
12/ 26 C.F.R. § 1.148-2(e)(2)(i)(B).
13/ 26 C.F.R. § 1.148-2(e)(2)(i)(C). The Internal Revenue Service ("IRS") has ruled that the
due diligence test is not met when bonds are deliberately issued earlier than necessary to
prolong the period during which arbitrage profits are earned. See IRS Rev. Rul. 80-204,
1980-2 C.B. 51.
14/ 26 C.F.R. § 1.148-2(b)(1).
15/ See 26 C.F.R. § 1.148-1.
D. Weiss's Preliminary Conversation with Mento
Weiss testified that he had a preliminary conversation with Mento before responding to
Shupe. During that conversation, Mento described the construction projects contemplated by the
School District. Weiss understood that the projects included repairs to, and renovations of, the
elementary school, and that certain repair work would begin at the end of the 2000 school year.
Mento informed Weiss that there was "some back and forth, some uncertainty" about the
elementary school renovations, but Weiss believed that the elementary school project was
"moving forward." Mento admitted to Weiss that the Board did not have a consensus on the
middle school project.
Mento further informed Weiss that an architect was "on board." Weiss testified that he
interpreted this expression to mean that "Eckles was project architect for these capital repair
projects and any other project" the School District was going to undertake.
E. Weiss's Role as Bond Counsel
After his conversation with Mento, Weiss called Shupe and agreed to write the bond
opinion. The School District retained Weiss as bond counsel. Weiss testified that bond counsel
is retained in a municipal securities transaction "to assure that the bonds are validly issued and to
provide an opinion to that effect, as well as to the effect that they are issued on a tax-exempt
basis." 16/ Weiss testified that an unqualified opinion is required so that investors can be assured
that interest on the bonds is "exempt from federal taxes." 17/
16/ Both parties point to the industry standard of care for bond counsel set forth by the
National Association of Bond Lawyers ("NABL"). Under NABL standards in effect
during the relevant period,
[b]ond counsel should not render an "unqualified opinion" as to the validity and
tax exemption of bonds unless it has concluded that it would be unreasonable for
a court to hold to the contrary. Bond counsel may reach such a conclusion as to
federal income tax issues addressed in the opinion by determining that there is no
reasonable possibility that the Internal Revenue Service would not concur or
acquiesce in the opinion, if it considered all material legal issues and relevant
1997 NABL Model Bond Opinion Report at p.7. In addition, bond counsel's opinion
should be based on a reasonably sufficient examination of material legal and factual
sources and reasonable certainty as to the subjects addressed. 1993 NABL Statement
Concerning Standard Applied in Rendering the Federal Income Tax Portion of Bond
Opinions at p.9.
We have stated that, "[w]hile compliance with industry standards is a consideration, it is
only one factor to be weighed" in determining liability under the federal securities laws.
See Piper Capital Mgmt., Inc., Exchange Act Rel. No. 48409 (Aug. 26, 2003), 80 SEC
Docket 3594, 3607 & n.28, petition for review denied, No. 03-1349 (D.C. Cir. 2004)
(unpublished order). See also, e.g., SEC v. Dain Rauscher, Inc., 254 F.3d 852, 857 (9th
Cir. 2001) ("The industry standard is a relevant factor, but the controlling standard
remains one of reasonable prudence."); Monetta Fin. Serv., Inc. v. SEC, 390 F.3d 952,
956 (7th Cir. 2004) (same) (quoting Dain Rauscher). The United States Court of Appeals
for the Ninth Circuit has held that the standard of care by which to measure conduct "is
not defined solely by industry practice, but must be judged by a more expansive standard
of reasonable prudence, for which the industry standard is but one factor to consider."
Dain Rauscher, 254 F.3d at 856; see also Newton v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266, 274 (3d Cir.) ("Even a universal industry practice may still be
fraudulent."), cert. denied, 525 U.S. 811 (1998).
17/ An unqualified opinion "describes an opinion that is subject only to customary
assumptions, limitations, and qualifications, and that is not otherwise 'explained.'" 1997
NABL Model Bond Opinion Report at p.7. An unqualified opinion assures investors that
the risk of the IRS declaring the Notes taxable is so "small" that the investor "need not
factor it into the calculation of the price he is willing to pay." Id.
F. Solicitor Flannery's Concerns
Mento relayed Shupe's proposal to Richard Flannery ("Solicitor Flannery"), the School
District's solicitor and brother of School Board President Harry Flannery. 18/ Solicitor Flannery,
who served as solicitor during the School District's prior bond issues, indicated to Mento that he
was "not comfortable with the concept being presented." Solicitor Flannery told Mento that the
proposal was "not consistent with" the School District's past experience. Solicitor Flannery
explained that, "typically," the School District would begin a project "quickly after a bond issue
was approved, and this sounded different"; "[h]istorically, the [School] [D]istrict was about ready
to proceed more close at a point in time with projects" than the situation here. Solicitor Flannery
also asked why the School District was not "bidding" out the underwriting work, as had been
According to Solicitor Flannery, Mento responded that Shupe "had a new concept or way
of doing a bond issue." He testified that Mento claimed that the School District "did not have to
be at the ready to dig ground when the bonds were issued. That's why [Shupe] was the person
the district needed." Mento also informed Solicitor Flannery that Weiss would be the School
District's bond counsel.
G. Weiss's May 2, 2000 Letter
Weiss learned from Mento that Solicitor Flannery had concerns that the School District
had not decided which projects it was going to undertake. Weiss also understood that Solicitor
Flannery had a question about "how far along" the School District had to be on its list of projects
before it could do a financing.
In response to those concerns, Weiss wrote a letter to Solicitor Flannery dated May 2,
2000. Weiss began the letter by stating that he had prior experience with "similar notes."
Solicitor Flannery testified that he believed this statement meant that Weiss was an expert on
whom he could rely for questions he had on the note issue. At the hearing, however, Weiss
18/ Solicitor Flannery testified that, as solicitor, he was a part-time employee of the School
District, and devoted, at most, 15% of his practice to School District matters. Solicitor
Flannery represented the School District in "all general matters that might come before
the district, including assessment appeals, grievances involving teachers, suspension
issues involving students, [and] policies of the district that required legal participation."
Solicitor Flannery stated that, "[w]henever we [the School District] got into areas
requiring specific expertise, we would bring in outside counsel." Solicitor Flannery did
not act as bond counsel for the School District on any bond or note issue.
admitted that he had never before given an opinion on a note issue structured similarly to the
Weiss also stated that "the School District will be able to invest the proceeds of the Notes
in available Treasury obligations during the period of the Notes," without mentioning the
requirement that, absent objectively reasonable plans to use the proceeds, interest on the Notes
would be taxable. Weiss concluded by stating that, "because there [were] capital projects being
contemplated for which proceeds [would] be used should the projects be undertaken," he
believed that issuance of the Notes was "totally proper and authorized under the [Internal
Revenue] Code." (Emphasis supplied.) At the hearing, Weiss was asked by the Division if this
statement was contrary to the Treasury regulations because it suggested that the School District
was not required to actually undertake any projects. Weiss agreed that his statement in the letter
"[did not] read as the Treasury regulations read." Weiss wrote the May 2 letter without having
met with the Board and without having reviewed any documents. Weiss admitted that he based
his assertions in the May 2 letter exclusively on his preliminary conversation with Mento.
Solicitor Flannery, after receiving the May 2 letter, spoke with Weiss over the telephone.
Solicitor Flannery testified that "probably the most important part" of their conversation involved
the "timing of expenditures." While Solicitor Flannery believed that the School District intended
to proceed with projects, he wondered when the School District would be able to go forward with
projects. He recalled that "the only thing that came out of that conversation was what I would
refer to [as] an 85 percent rule, where the bond money would have to be spent during the three
years of the bond issue." Solicitor Flannery testified that he understood from Weiss that the
money could be spent "any time during the three years, as long as it was spent on the projects."
He understood further that, in the course of this three-year period, the School District could
invest the money it was not using and "legitimately earn interest" that could be used for projects.
During the conversation, Weiss did not tell Solicitor Flannery that the School District had
to incur an obligation to spend 5% of the net proceeds within six months. Nor did Weiss tell
Solicitor Flannery that the School District had to proceed with due diligence. Weiss testified that
he did not consider these requirements to be an "issue" because he understood the School District
was "moving forward" with certain elementary school repairs after the 2000 school year ended.
In Weiss's judgment, the cost of those repairs "easily could have exceeded" the 5% requirement.
Weiss also did not discuss with Solicitor Flannery any potential downside to the transaction, i.e.,
the risk to the Notes' tax-exempt status if the School District did not comply with Treasury
19/ Weiss had been consulted regarding other three-year notes, but those notes had not been
issued. Weiss's expert, Henry Klaiman, found Weiss's misrepresentation of his expertise
to be "puffery," and testified that he, Klaiman, "would not do it."
H. May 8, 2000 Board Meeting
Weiss and Shupe met with the Board on May 8, 2000, shortly after Weiss's telephone
conversation with Solicitor Flannery. Before the meeting, Weiss and Shupe met in Mento's
office, where Mento reiterated the nature of the elementary school repairs and renovations.
Weiss saw "some documents" from the Eckles firm on a table in the office, but he did not
At the May 8 meeting, Shupe presented the Note transaction as a means for the school
district to make money by investing, and not spending, the Note proceeds. Shupe stated that
there was a "loophole" in the federal tax laws that would allow school districts to borrow tax-free
money just to invest the proceeds for profit. He indicated that the School District could earn
$225,000 by investing 100% of the net Note proceeds in higher yielding investments for the full
three-year period of the Notes. 20/
Shupe's written proposal, which was circulated at the May 8 meeting, tracked his oral
presentation. The proposal stated that "current tax regulations allow school districts to prefund
construction projects for up to three years, to borrow up to $10 million in any calendar year, and
to keep any positive investment earnings gained on the money." The proposal also stated that
school districts "have and are borrowing in advance of projects just to invest the proceeds for
three years and legally keep the positive investment earnings." The proposal gave the example
that a school district could borrow $9.6 million for three years on a tax-exempt basis and pay an
annual interest rate of 5.10%. The school district could invest the net Note proceeds in United
States Treasury securities over the same three-year period at a yield of 6.56%, to generate "excess
earnings," less issuance costs, of $225,000. Under this example, $225,000 in profits would be
available to the school district from the investment of the net proceeds.
Weiss admitted that he understood that Shupe's proposal assumed that the School District
would invest 100% of the net Note proceeds for the full three years. Weiss testified that he knew
school districts could not borrow money just to invest the proceeds, and that Shupe's assertion to
that effect did not accurately describe the Treasury regulations. Weiss's expert, Henry Klaiman,
conceded that Shupe's proposal was a red flag to reasonable bond counsel because it indicated
20/ Weiss disputes Shupe's calculation of the School District's potential arbitrage profits. He
contends that the correct figure was $430,000, and not $225,000. For the purpose of our
analysis, the difference in the calculation of potential arbitrage profits is immaterial. The
Treasury regulations do not specify the amount of arbitrage profits that can be earned by
an issuer. Rather, they proscribe the issuer's investment of note proceeds without meeting
certain minimum requirements.
that "maybe the money [was] not going to be spent." 21/ Weiss's other expert, Wayne Gerhold,
stated that the standard industry practice for bond counsel, after being shown a proposal like
Shupe's, would be to "get up right away" and "indicate that this [was] not legal." Gerhold also
testified that, in such circumstances, bond counsel should "go into a little more detail" about the
Treasury regulation requirements.
Weiss did not advise the Board that Shupe's proposal was "not legal." Instead, Weiss
advised the Board that the proposal "wasn't exactly the case." Weiss testified that he told the
Board members that "they had to have projects, that they had to spend the money in three years[,]
and they had to proceed with [the projects]." Weiss further told them that, "[i]f they didn't want
to do the project[s], [he] shouldn't be there." 22/ Weiss believed the Board members understood
him because "[t]hey all nodded their heads." In addition, the Board members nodded their heads
when Weiss mentioned that there was an architect "in place." Weiss testified that he interpreted
the nods as a sign that the Board had approved Eckles' participation in the projects. As a result,
Weiss did not ask to contact Eckles or see a copy of any contract with the firm. Weiss made no
further inquiries about Eckles.
The five Board members who testified stated that Shupe's proposal to invest the Note
proceeds for three years was the "focus" of the May 8 meeting. According to their testimony, the
Board understood that the plan was to invest the Note proceeds at a higher rate of interest than
the rate the School District was to pay the noteholders and retain the difference. The Board
believed that the School District could make money on the interest rate difference, and thereby
have more money to fund school projects. At the May 8 meeting, Board members questioned
21/ We note that, during the proceeding below, the law judge stated that she had accepted the
opinions of Weiss's experts, but rejected those of the Division's experts "as inconsistent
with the credible testimony and exhibits." In resolving the issues in this case, we have
appraised and given such weight to the expert testimony as we consider is indicated by
the relevant facts in the record. See, e.g., West Penn Elec. Co., 29 S.E.C. 685, 693 n.7
(1949) ("[w]hile an expert's testimony may properly be given substantial weight by the
Commission, it has the duty to make its independent analyses and findings") (citing SEC
v. Central-Illinois Sec. Corp., 338 U.S. 96 (1949)). Moreover, we reiterate that, although
expert testimony as to industry practice, in this case, NABL standards, is relevant to show
the standard of care necessary to evaluate Weiss's liability, that standard ultimately is one
of reasonable prudence. See Dain Rauscher, 254 F.3d at 856 ("[I]t is well-settled that
proof of adherence to an industry practice or custom is not dispositive of the issue of
negligence, because what ought to be done is fixed by a standard of reasonable prudence,
whether it usually is complied with or not.") (citations and internal quotations omitted).
22/ Weiss also testified that, after the May 8 meeting, he took Shupe aside and told him that
his proposal was wrong. Shupe, however, did not remember having such a discussion.
Rather, Shupe recalled that Weiss said he thought it had been a good meeting.
Weiss about the propriety of Shupe's proposal. Board member Hennon stated that "[t]here was
some incredulity, skepticism about this. There were questions along the nature of is this too
good to be true." When asked about Weiss's response to those questions, Hennon stated that
Weiss "endorsed it [the proposal]. He said absolutely, it was legal, it was being done, it was an
opportunity not to be missed, and that, no, it was not too good to be true." Hennon also stated
that she asked Weiss whether "the bond issue committed [the School District] to a building
project," and that Weiss answered, "No. As long as you [the Board members] have intent or
reasonable expectations to do the project[s], you don't actually have to do them at the time the
notes were issued. If the intent was there, that was adequate." Other Board members' hearing
testimony supported Hennon's recollection of the discussion at the May 8 meeting.
Weiss acknowledged that, during the May 8 meeting, he did not advise Board members
about the time test -- the requirement that the School District enter into binding commitments to
spend 5% of the net Note proceeds within six months of the issue date of the Notes. Weiss "saw
no reason to get into 5% rules" because he understood that there were several repair projects set
to begin at the end of the 2000 school year which would have satisfied the 5% requirement. 23/
At the hearing, Weiss did not explain the basis for his conclusion that the cost of those repairs
would amount to 5% of the net Note proceeds.
Weiss also acknowledged that he did not advise Board members about the due diligence
test -- the requirement that the School District complete the projects with due diligence. Weiss
testified that he believed the School District was "moving forward" with the elementary school
repairs, so that the due diligence test "wasn't an issue." While Weiss mentioned in passing the
expenditure test -- the requirement that the School District expend 85% of the net proceeds in
three years, he did not tell the Board that it needed to have "objectively reasonable expectations"
that those proceeds could be spent, nor did he explain to the Board what that phrase meant. As
President Flannery testified, Weiss and Shupe told the Board that the School District "needed to
have the intent to do the projects and . . . the interest would be available to [it], even if [the
School District] didn't follow through with the projects."
Weiss's expert, Gerhold, acknowledged that a reasonable bond lawyer would have
advised the School District of the time test because the School District had not decided on the
23/ Weiss also argues that he had no reason to explain the time test because Pennsylvania
architects who participate in school construction projects typically receive 6% to 7% of
the total cost of the projects as their fees. Consequently, if an architect is "on board," as
Weiss believed Eckles was, the 5% requirement "takes care of itself." As indicated
above, Weiss made no inquiries about Eckles' relationship with the School District. In
addition, Weiss admitted he was unsure of the scope of the School District's engagement
with Eckles. In the absence of information about Eckles' engagement with the School
District, we fail to see how Weiss reasonably could have believed that the architect's fee
would "take care of" the 5% requirement.
scope of its major projects and whether they would include a new middle school. Solicitor
Flannery testified that the time test "would have raised a lot of red flags" because it "would have
meant that the [B]oard probably would have started asking questions about when do we have to
have our consensus" on moving forward with the various projects. Two Board members testified
that knowledge of the time test would have affected their vote to authorize the Notes' issuance.
Weiss's failure to inform the Board of the due diligence test gave Board members the
impression that there was no "urgency" in proceeding with projects. President Flannery stated
that, based on Weiss's legal advice to the Board, "there was no need to proceed -- there was no
hammer over our [the Board's] head. The project[s] didn't even have to occur, and we wouldn't
have any problems." President Flannery added that it was "understood that[,] if we did not do the
projects, there would be no downside."
I. Board Approves Financing Proposal
Board members left the May 8 meeting agreeing in principle to Shupe's proposal pending
Solicitor Flannery's approval. Solicitor Flannery subsequently spoke to Weiss and Mento and
reviewed a list of proposed projects prepared by Mento. Thereafter, he informed the Board that
he was "not opposed to" the transaction. Meanwhile, Shupe was preparing the final proposal to
be presented to the Board at its May 31, 2000 meeting. Shupe showed Weiss a provision that
"tied up" Note proceeds for the full three-year period of the Notes. When Weiss objected to
Shupe that this was "contrary to the concept of spending the money," Shupe took the provision
out of the proposal.
Between May 8 and May 31, 2000, Weiss had no discussions with any school officials
regarding the status of the construction projects to be financed by the Notes. Weiss attended the
May 31 meeting. In spite of Shupe's earlier proposal that the Board invest the entire proceeds for
three years, Weiss did not tell Board members that tying up the Note proceeds for the full three-
year period could result in the Notes being considered taxable. Weiss asserted that he believed
that tying up the money was a "dead" issue because the provision had been eliminated from the
proposal. The Board approved the final proposal, which structured the Notes on a three-year
basis, with a one-year call.
J. Weiss Prepares Non-Arbitrage Certificate
On June 1, 2000, Weiss wrote to Mento and requested the list of projects to be financed
by the Notes and their associated costs, so that the Board could approve the projects at a Board
meeting scheduled for June 15, 2000. Weiss knew that the Board had not awarded bids or even
authorized advertising for the bids. He sought its approval because he wanted assurance that the
School District would proceed with the projects. In his own words, Weiss "wanted evidence that
the Board had seen the list and voted on it, [and] said, this is what [the Board was] . . . going to
However, Weiss did not ask Mento for evidence that the School District had committed
to undertake any of the projects for which estimates were to be provided. Nor did he ask Mento
for evidence that the School District was in a position to spend the money within three years.
Instead, Weiss enclosed a response letter for Mento to complete and sign. The draft letter stated,
"In conjunction with the issuance of the School District's General Obligation Notes, Series of
2000, the Board of School Directors has authorized the issuance of this letter which sets forth
capital projects which the District is contemplating undertaking in the next three years to utilize
the proceeds of the Note issue." (Emphasis supplied.) The draft letter provided space for a list of
the projects and their estimated costs.
In the response letter, dated June 15, 2000, Mento repeated Weiss's language that the
Board had "authorized the issuance of this letter which sets forth capital projects which the
School District is contemplating undertaking." The June 15 letter listed thirty-three projects, but
omitted any cost estimates or prioritization among the projects. This letter was the only School
District document that Weiss examined. Weiss admitted that he was "upset" when he received
the letter because it did not contain cost estimates. Weiss called Mento and again asked for
costs, but he did not get them.
Weiss acknowledged that he should have obtained a list of costs. Weiss's expert,
Klaiman, testified that reasonable bond counsel would want to know "how much money [was]
involved" with the school projects, and whether there were "enough projects to absorb the
proceeds of the bond issue." Weiss did not know "how much money was involved" because he
did not have cost estimates for any of the projects. 24/ Weiss also did not know if there were
"enough projects to absorb" the $9.6 million in Note proceeds because he never obtained
evidence that the Board had voted on or approved any of the thirty-three projects on the list.
There is no dispute that neither the Board nor any of its members saw Mento's June 15 letter.
Had Weiss examined minutes of Board meetings, he would have discovered that the Board had
yet to vote on or approve a single project to be financed by the Notes. Weiss, however, never
looked at or asked for Board minutes or any other documents to confirm the Board's purported
Applicable Treasury regulations require an issuer to certify a statement of its reasonable
expectations to use note proceeds on projects. This certification is accomplished in a Non-
24/ At the hearing, a School District witness testified that "there was no study done to exactly
know how much money" all the projects on the list were going to cost because "we [the
Board] hadn't decided on what [projects] we were going to do."
Arbitrage Certificate. The Non-Arbitrage Certificate "must state the facts and estimates that
form the basis for the issuer's expectations" as of the issuance date. 25/
Weiss prepared the Non-Arbitrage Certificate certifying the School District's reasonable
expectations to spend Note proceeds. The Non-Arbitrage Certificate provided that the proceeds
were to be used to fund "capital projects." The term "capital projects," however, was not defined.
Weiss acknowledged that "greater specificity" "might not have been wrong," but believed it was
understood that a "capital project" referred to a "new money" project as opposed to a refunding.
On page six of the thirteen page Non-Arbitrage Certificate, it stated:
The Issuer reasonably expects that prior to the expiration of six months following the date
hereof (the "Closing Date"), there will be binding obligations to expend in the aggregate
at least five (5%) percent of the proceeds of the Notes (net any reserve funds established
with proceeds of the Notes) for costs of the acquisition, construction, equipping or
improvement of the Project. The Issuer reasonably expects that the Project will proceed
with due diligence to completion. The Issuer reasonably expects that at least eighty-five
(85%) percent of the proceeds of the Notes (net of any reserve funds established with
proceeds of the Notes) will have been expended prior to the date that is three years from
the Closing Date.
Weiss admitted that the Non-Arbitrage Certificate did not contain "estimates," meaning figures
indicating "how much [the construction projects were] going to cost." Weiss prepared the Non-
Arbitrage Certificate based on the list of thirty-three projects from Mento and his conversations
with Mento, Solicitor Flannery, and the Board. Weiss testified that he relied on the Non-
Arbitrage Certificate in issuing his unqualified opinion.
K. Weiss Reviews and Approves Official Statement
In addition to preparing the Non-Arbitrage Certificate, Weiss reviewed and approved the
Official Statement, the School District's disclosure document that Shupe drafted. The Official
Statement indicated that the purpose of the Notes was to "provide funds for capital improvement
projects." It also referred to the fact that Weiss, as bond counsel, had rendered an opinion that
interest on the Notes was tax-exempt. It did not discuss or disclose the existence of any risk to
the Notes' tax-exempt status. The Official Statement further provided that the Notes were "not
arbitrage notes." It also stated that the Non-Arbitrage Certificate would be "accompanied by an
25/ 26 C.F.R. § 1.148-2(b)(2). Under NABL standards, bond counsel may base an
unqualified opinion on the assumption that the Non-Arbitrage Certificate is accurate
unless it "has knowledge that any such assumption or condition is false, or has knowledge
of facts that, under the circumstances, would make it unreasonable so to assume." 2003
NABL Model Bond Opinion Report at p.12.
opinion [of] [c]ounsel, based solely upon the facts, estimates and circumstances set forth in the
L. Weiss Issues Two Legal Opinions
Weiss stated that, before he issues an unqualified opinion, he ascertains that the Treasury
regulation requirements are met. In making this determination, Weiss considers whether there is
a "defined project"; whether there is a time schedule for spending the proceeds; whether the
project is for a new building or an addition; and whether there is a "professional team" in place,
for example, an architect or a project manager. Weiss agreed that, with a nine-member school
board, such as the Board in this case, he would require some assurance that a clear majority of
members wished to proceed with the project. Had Weiss inquired, he would have found that the
School District had not determined to begin work on any major construction project at the time
the Notes issued. The testifying Board members agreed that, as of June 2000, the Board had not
reached a consensus on the major projects to be undertaken. The Board was still in "the very
early stages" of decision-making, "looking at floor plans" and "preliminary schematics." 26/
Nonetheless, after approving the Official Statement, Weiss prepared a proposed
unqualified opinion addressed to potential note purchasers and to be printed on the reverse side
of each note. In the opinion, Weiss stated that the School District "determined to undertake"
projects requiring "in excess" of $10 million, and that all the Note proceeds, less issuance costs,
would be used to fund the projects. He also stated that interest on the Notes would not be subject
to federal income taxation. He further stated that the Notes were not "arbitrage bonds." Weiss
prepared a "supplemental opinion of note counsel" affirming that nothing had come to his
attention that would lead him to believe that the Official Statement was materially inaccurate or
incomplete. Both opinions were required by the Note Purchase Agreement.
M. June 28, 2000 Closing
At the closing, Weiss delivered his legal opinions. Weiss also reviewed generally all of
the documents with President Flannery, who signed the Official Statement. President Flannery
testified that he relied on Weiss's advice in signing the document because Weiss had the
"expertise." Solicitor Flannery signed a standard form solicitor's opinion that Weiss prepared.
The school business manager, Sharon Robinson, signed the Non-Arbitrage Certificate.
Weiss's expert, Klaiman, testified that reasonable bond counsel would have ensured that the
26/ Weiss also never inquired whether the School District had a feasibility study, despite his
awareness that such a study was an initial step to obtain state reimbursement. At no time
did Weiss seek to ascertain the School District's status in the reimbursement process,
even though he knew that the process required major projects to be approved by the state
before construction could begin.
official signing the Non-Arbitrage Certificate understood the document before it was signed.
Weiss admitted that he did not explain the Non-Arbitrage Certificate to Robinson, despite the
fact that he believed she was "not a sophisticated person." Robinson testified that she signed the
Non-Arbitrage Certificate "pretty much having no idea what the document meant."
The School District thereupon issued $9.6 million in three-year general obligation notes,
dated May 15, 2000. 27/ The Notes had an interest rate of 5.25% and a stated maturity date of
May 15, 2003. The Notes were structured in accordance with Shupe's proposal, with a one-year
call. All the net Note proceeds were initially invested in money-market funds because "the yields
were dropping" in the Treasury Market. Shupe testified that he eventually invested the entire net
Note proceeds in Federal Home Loan Bank securities maturing in 2003, so the School District
could earn the $225,000 in profits that it sought. Before the closing, Weiss did not inquire about
the disposition of the Note proceeds. Nor did he tell Shupe that the funds should be kept
available for use on projects. Weiss's engagement as bond counsel ended at the conclusion of the
bond closing. Weiss received $9,509.63 for his work. Weiss's fee was paid out of Note
N. IRS Declares Notes Taxable
On November 8, 2000, the IRS sent a letter to the School District indicating that it had
commenced an examination of the Notes. The IRS began investigating three-year note issues in
the Commonwealth after receiving information that some school districts were "bragging" about
making money from tax-exempt bond issues. On November 16, 2000, Weiss received the IRS's
November 8 letter from the School District. Weiss claimed that he did not know that the Board
had placed the net Note proceeds in a three-year investment until he received a copy of the
Board's bank statement requested by the IRS. Although the School District still had six weeks to
enter into binding commitments to spend 5% of the net proceeds, Weiss assisted the School
District in redeeming the Notes. The Notes were redeemed at the first available call date, one
year after the Notes were issued, on May 15, 2001. The redemption price for the Notes was paid
from the Note proceeds. The Notes were fully redeemed as of June 15, 2001. None of the Note
proceeds were spent on construction projects. The School District was left with around $150,000
in arbitrage profits after calling the Notes.
On September 25, 2001, the IRS issued a preliminary determination that the interest on
the Notes was taxable. In the IRS's view, the School District issued the Notes with no reasonable
27/ The record is unclear as to why the Notes were dated May 15, 2000, but the Note closing
was not held until June 28, 2000.
expectations to use the proceeds on capital projects. 28/ The School District and IRS eventually
entered into a closing agreement under which the School District agreed to rebate its arbitrage
profits to the IRS.
O. Post-Closing Events
No work was performed on any construction project for over a year after the Notes were
issued. The Board did not authorize the elementary school repairs, which were supposed to start
at the end of the 2000 school year, until June 2001. The total cost of those repairs was around
$350,000, significantly less than $480,000, or 5% of the $9.6 million the Board was obligated to
commit to spending in the first six months under the Treasury regulations.
In October 2001, the Board formally retained the Eckles firm. In 2002, the Board reached
an agreement on the major construction projects and held public hearings. The Board decided in
favor of renovating the existing elementary school, and against building a new middle school.
The elementary school renovations began in May 2003 and were financed with other funds.
When Board member Hennon was asked to identify "the single most important factor . . . as to
why that work didn't start sooner," she replied, "[i]ndecision," meaning "an inability [by the
Board] to come to a conclusion about the scope" of its major projects.
Securities Act Sections 17(a)(2) and 17(a)(3) make it unlawful for any person in the offer
or sale of any securities to obtain money or property by means of any material misrepresentations
or omissions, or to engage in any transaction, practice, or course of business which operates as a
fraud or deceit on the purchaser. 29/ Proof of scienter is not required to establish violations of
28/ At the hearing, an IRS official testified that the IRS considered the following: that "the
bulk of the money . . . was locked up" in a security that matured "three years out"; that it
was "rare" for notes to be issued "without intensive discussion of how much and when the
money will be spent"; that there was "a virtual absence in any discussion of the [Board's]
minutes about any significant project as much as a year or so after the notes were issued";
that no Board members were able to "recall discussing how likely these [projects on the
June 15 list] were and how much they would cost"; and that "to find a list of projects with
no discussion of costs is very unusual" because school districts "seem to obsess on how
much things are going to cost because they want to keep the taxes down for the citizens."
29/ Neither party disputes that all of the statements and omissions at issue here were made in
connection with the offer, purchase, or sale of securities, i.e., the Notes.
those provisions; negligence alone is sufficient. 30/ Negligence is the failure to exercise
reasonable care. 31/
Weiss is primarily liable for his role in the Note issue. 32/ Weiss reviewed and approved
the Official Statement, which misrepresented that Note proceeds would be used to fund school
construction projects. Weiss also rendered an unqualified bond opinion, reinforced by a second,
supplemental opinion, that misrepresented the risk that interest on the Notes would be taxable.
The Official Statement referred to Weiss's unqualified opinion that interest on the Notes would
be tax-exempt. Weiss knew the statements in the Official Statement and in his legal opinions
were communicated to, and relied on, by prospective investors in deciding whether to purchase
the Notes. 33/ As the Division's expert testified, the Notes were sold to investors, and priced,
30/ Aaron v. SEC, 446 U.S. 680, 697 & 701-02 (1980).
31/ SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997).
32/ Courts have held that a person may be primarily liable under Exchange Act Section 10(b)
and Rule 10b-5 for directly or indirectly making an untrue statement of fact if that person
creates a false statement that reaches investors. See, e.g., In re Enron Corp. Sec. Litig.,
235 F. Supp. 2d 549, 588 (S.D. Tex. 2002) (adopting the Commission's proposed test for
liability under Exchange Act Rule 10b-5, and stating that a person is primarily liable
when he creates or writes misrepresentations for inclusion in document to investors); In re
ZZZZ Best Sec. Litig., 864 F. Supp. 960, 970 (C.D. Cal. 1994) (holding accountant liable
if it was "intricately involved" in drafting company's fraudulent financial reports and
press releases, including "incorporat[ing] data" it had prepared into them and
"modif[ying] the financial data [they] contained"); In re Software Toolworks, Inc., 50
F.3d 615, 628 n.3 & 629 (9th Cir. 1994) (accounting firm could be primarily liable under
Exchange Act Section 10(b) when it reviewed and played significant role in drafting and
editing letters to Commission containing misstatements), cert. denied, 516 U.S. 907
(1995). United States v. Naftalin, 441 U.S. 768 (1979), holds that Exchange Act Section
10(b) and Securities Act Section 17(a) prohibit some of the same conduct. Id. at 778.
Weiss does not assert that he should be at most an aider and abetter and not primarily
33/ Courts have held that, when a lawyer provides an opinion letter or drafts disclosure
documents that contain a material misstatement or omission of fact, the lawyer may be
held liable for violations of the securities laws. See, e.g., SEC v. Fehn, 97 F.3d 1276,
1294 (9th Cir. 1996) (holding that attorney violated federal securities laws by editing and
filing misleading Forms 10-Q that were prepared by attorney's law firm), cert. denied, 522
U.S. 813 (1997); Ackerman v. Schwartz, 947 F.2d 841, 848 (7th Cir. 1991) (stating, with
respect to Exchange Act Section 10(b) and Exchange Act Rule 10b-5 allegations, that
based on Weiss's unqualified opinion that interest on the Notes would be tax-exempt. Weiss also
knew that information about the Notes' tax-exempt character was material to investors because
they would have wanted to know that their interest earnings might be taxable, at a minimum
reducing the return from the Notes. 34/
A. Weiss's Conduct
Before rendering an unqualified opinion, Weiss was obligated to determine, based on all
the objective facts and circumstances, whether the School District had reasonable expectations to
satisfy the expenditure, time, and due diligence tests as of June 28, 2000, the issuance date of the
Notes. Weiss acknowledged that he also was obligated to conduct a reasonable investigation of
the facts to establish the objective reasonableness of the School District's expectations. The
evidence adduced at the hearing indicates that Weiss knew or should have known that the Note
transaction was intended to earn arbitrage profits, and that the School District lacked sufficiently
concrete plans for the use of the proceeds to justify the Notes' tax-exempt status. The evidence
also indicates that Weiss did not make adequate inquiry to determine the level of certainty of the
School District's construction plans, objectively viewed, before reviewing and approving the
Official Statement and issuing his legal opinions. Weiss's failure to look for even minimal
objective indicia of the School District's reasonable expectations to spend Note proceeds on
projects was at least negligent. From the outset of the transaction, Weiss understood that the
attorney "cannot evade responsibility to the extent he permitted the promoters to release
his [opinion] letter"; noting that, if the attorney "authorized the inclusion of the [opinion]
letter with the offering documents, then he appears as a principal . . . and not as an aider
Cf. Restatement (Third) of the Law Governing Lawyers § 56, cmt. b (2000) ("Lawyers
are subject to the general law. If the activities of a nonlawyer in the same circumstances
would render the nonlawyer civilly liable or afford the nonlawyer a defense to liability,
the same activities by a lawyer in the same circumstances generally render the lawyer
liable or afford the lawyer a defense.").
34/ Information is material if there is a substantial likelihood that reasonable investors would
consider it important in making their investment decision. Basic Inc. v. Levinson, 485
U.S. 224, 231-32 & 240 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445
(1976). The Commission has stated that "[t]ax-exempt securities typically pay a lower
interest rate than other debt securities, which interest rate differential investors accept
because of the tax-exempt status. Thus, if the securities are not tax-exempt, the interest
rate is not competitive and the securities are not as attractive to investors." County of
Orange, California, Securities Act Rel. No. 7260 (Jan. 24, 1996) (settled case), 61 SEC
Docket 395, 422-23.
Board had gone "back and forth" on the elementary school project, and that the Board had not
committed to the middle school project. He also understood that Solicitor Flannery had concerns
about the financing because the Board had not determined which projects it was going to
After being advised of Solicitor Flannery's concerns, Weiss wrote the June 2 letter in
which he misstated the Treasury regulation requirements by indicating it was sufficient for the
tax-exempt status of the Notes that the School District merely "contemplate" projects on which
the Note proceeds would be spent "should the projects be undertaken." In a follow-up
conversation with Solicitor Flannery, Weiss told Solicitor Flannery of the requirement that the
School District spend 85% of the net proceeds in three years. However, as he acknowledged,
Weiss did not mention the potential risk to the Notes' tax-exempt status if the School District did
not spend that amount during the three-year period. Nor did Weiss describe the time and due
At the May 8 meeting, Shupe articulated to the Board the arbitrage opportunity presented
by the Note transaction. Weiss understood that Shupe proposed that the School District issue the
Notes solely to invest the net proceeds and to earn $225,000 in arbitrage profits. Weiss admitted
that he knew at the time that Shupe's proposal was contrary to the Treasury regulations. Weiss
also admitted that he knew Shupe's $225,000 figure was based on the School District investing
all the net Note proceeds for the full three years, and not spending any of those proceeds, much
less 5% in six months or 85% in three years.
Board members asked Weiss if Shupe's proposal was "too good to be true." They also
asked whether the Note issue committed the School District to proceed with the projects, or
whether it was sufficient that there were projects to be done. Weiss did not advise the Board that
Shupe's proposal was illegal. Nor did Weiss explain what the Board had to do in order to comply
with the Treasury regulations. While Weiss informed the Board that it had to have projects, he
did not advise the Board about the time or due diligence tests. Those two requirements were
critical. The Board did not comprehend that it had to commit 5% of the net proceeds on projects
within six months of the issue date of the Notes, or that it had to proceed with due diligence to
complete the projects. At best, the Board was left with the impression that it had three years in
which to undertake projects. At worst, the Board believed that it merely had to identify some
projects that could be funded by the Notes. 35/
35/ Weiss's expert, Gerhold, testified that the standard industry practice for bond counsel,
when faced with an uncertain School Board and a financing proposal for unconfirmed
projects, would be to "speak strongly," if not "yell at" the School Board. Gerhold stated
that bond counsel should give a "finger pointing lecture . . . and get very firm with
regard to this, that at the time that you go into this transaction, and the closing, you better
be doing a project and it better be a project that has expenditures that are the same or in
Following the May 8 meeting, Shupe presented Weiss with a document showing Shupe's
intention to tie up the Note proceeds for three years in an illiquid investment. Weiss told Shupe
to take the provision out of the final Note proposal. Weiss did not mention to the Board when it
approved the Note issue that tying up the proceeds for a full three-year period could result in the
interest on the Notes being taxable.
Weiss also asked Mento for a list of projects that the Board "contemplated undertaking"
with associated costs. In response, Weiss received an unapproved list of potential projects,
without costs. At no time prior to the Notes' issuance did Weiss review a single cost estimate for
any of the projects. Despite the requirement that the Non-Arbitrage Certificate set forth the facts
and estimates underlying the issuer's expectations, Weiss prepared a Non-Arbitrage Certificate
that did not contain any estimates and was short on facts. Weiss himself recognized that he
should have obtained a list of costs.
Thereafter, Weiss failed to ascertain whether there was a time schedule for spending Note
proceeds, failed to confirm the nature and scope of any engagement with the architect, and failed
to determine whether a majority of Board members wished to proceed with the projects, despite
acknowledging that he viewed all of these considerations as important in issuing an unqualified
opinion. Indeed, the Treasury Regulations required, among other things, that the School Board
"incur within 6 months of the issue date a substantial binding obligation to a third party to
expend at least 5 percent of the net sale proceeds of the issue on the capital projects." 36/ Had
Weiss exercised even minimal care, he would have learned that there was no time schedule for
spending Note proceeds, no written contract with Eckles, 37/ and no agreement on proceeding
with any of the projects. At the time, Weiss was aware that the School District had not yet
advertised for bids. Nonetheless, Weiss reviewed and approved the offering documents, and
signed and reiterated an unqualified opinion that the Notes were tax-exempt, when he knew or
should have known that the School District's primary purpose in issuing the Notes was to earn
arbitrage profits, and that it did not have any objectively reasonable expectation of satisfying the
excess of what you are talking about, and if you don't, you better have a good reason why
you were not able to expend those funds."
36/ 26 C.F.R. § 1.148-2(e)(2)(i)(B).
37/ The record indicates that, at all relevant times, the School District and Eckles had an
informal agreement by which Eckles would provide services to the School District at no
Treasury regulations. 38/ His conduct departed from the standard of reasonable prudence and
was at least negligent. 39/ Weiss violated Securities Act Sections 17(a)(2) and 17(a)(3). 40/
B. Weiss's Contentions
1. Weiss notes that the Order Instituting Proceedings ("OIP") alleged that he "violated
Section 17(a) of the Securities Act" without specifying a particular subsection. 41/ Weiss argues
that the Division "made no allegations in the OIP supporting a violation of Section 17(a)(2) or
17(a)(3)," and did not assert before its final brief to the law judge that he was negligent. Weiss
concedes that the law judge considered whether he acted intentionally, recklessly, or negligently.
We believe that the OIP fairly placed Weiss on notice that all subsections of Securities
Act Section 17(a) would be at issue. While the Division's primary focus was violation of Section
38/ Weiss's reliance on SEC v. Haswell, 1979-1980 Fed. Sec. L. Rep. (CCH) ¶ 97.156 (W.D.
Okla. 1977), aff'd, 654 F.2d 698 (10th Cir. 1981), is misplaced. In holding that bond
counsel was not liable under the antifraud provisions, the district court there found that
counsel had no duty to insist on reviewing an offering circular in final form or withdraw
his tax opinions from the circular, when facts known to him were insufficient to place
him on notice of a fraud perpetrated by the underwriters. The district court also cited the
fact that the IRS had not disagreed with bond counsel's tax opinions. By contrast, in this
case, Weiss was responsible for misrepresentations and omissions in the Official
Statement and in his legal opinions regarding the School District's use of the Note
proceeds and the Notes' non-taxable nature. Weiss's liability stems from his making those
misrepresentations and omissions without conducting adequate inquiries, and not on any
failure to discover the fraud.
39/ See Jean Costanza, Securities Act Rel. No. 7621 (Jan. 6, 1999) (attorney serving as
municipal issuer's bond counsel in connection with eight note offerings consented,
without admitting or denying findings, to the entry of a cease and desist order in which
the Commission found that she violated Securities Act Sections 17(a)(2) and 17(a)(3) by
negligently participating in drafting offering documents and negligently issuing a legal
opinion that notes were tax-exempt), 68 SEC Docket 2730.
40/ Because we find that Weiss committed primary violations of Securities Act Sections
17(a)(2) and 17(a)(3), we do not decide whether he was also liable for causing the School
District's antifraud violations.
41/ Weiss notes that some conduct in the OIP was alleged to be committed "willfully."
Courts have held that willfulness under the securities laws "means intentionally
committing the act which constitutes the violation," not an intent to violate the laws or
rules. Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000).
17(a)(1), the OIP alleged misconduct that sounded in negligence. For example, the OIP charged
that Weiss drafted an "inaccurate" certificate and "made untrue statements of material fact and
omitted to state material facts" in connection with the note offering. Weiss's answer to the OIP
reflected his awareness that the allegations therein could provide a basis for negligence liability.
Weiss asserted in his answer that he acted with "due care" and performed his professional duties
in compliance with NABL standards, which he indicated were the applicable industry standards.
At the hearing, Weiss introduced expert testimony on the issue of whether his conduct conformed
to NABL standards, and was given full opportunity to defend himself. The OIP gave Weiss
sufficient notice of the charges against him. 42/
2. Weiss contends that, for the purposes of his unqualified opinion, he was entitled to
rely on the representations from School District officials and Board members that the School
District had projects it intended to undertake and plans to proceed with them. As bond counsel,
Weiss was obligated to determine whether all the objective facts and circumstances, established,
for example, by Board minutes and resolutions, contracts, and estimates, justified an unqualified
opinion that the Board's intention to undertake projects satisfied the objective standard under the
Treasury regulations. Weiss's reliance on vague, subjective expressions of intent to undertake
projects, without independent inquiry, was unreasonable and an abdication of his responsibilities
as bond counsel. 43/ Moreover, even assuming that the School District had projects it was
planning to do in the future, the Notes were issued prematurely. Treasury regulations provide
that issuers may not issue bonds any sooner than necessary. 44/
42/ See, e.g., Aloha Airlines, Inc. v. Civil Aeronautics Board, 598 F.2d 250, 262 (D.C. Cir.
1979) (notice is "sufficient if the respondent 'understood the issue' and 'was afforded full
opportunity' to justify its conduct during the course of the litigation").
43/ Compare Attorney's Conduct in Issuing an Opinion Letter, Exchange Act Rel. No. 17831
(June 1, 1981) (in a report issued under Exchange Act Section 21(a), the Commission
opined that an attorney who served as counsel for an underwriter in connection with a
bond offering failed to carry out his professional obligations when he issued a false
opinion letter without making adequate factual inquiry; the Commission stated that "the
preparation of an opinion letter is too essential and the reliance of the public too high to
permit due diligence to be cast aside in the name of convenience"), 22 SEC Docket 1200,
44/ See 26 C.F.R. § 1.148-10(a)(4) (a transaction illegally overburdens the tax-exempt market
"if it results in . . . issuing bonds earlier . . . than is otherwise reasonably necessary to
accomplish the governmental purposes of the bonds"). The Non-Arbitrage Certificate
prepared by Weiss recited this requirement. In addition, the IRS witness testified at the
hearing that, if the School District planned to do the projects at a future date, it should
have issued the Notes later.
3. Weiss contends that he was entitled to rely on the Non-Arbitrage Certificate. Weiss
concedes, however, that he could not base an unqualified opinion on the Non-Arbitrage
Certificate if he was aware of facts indicating that it was inaccurate. The Non-Arbitrage
Certificate contained no cost estimates and was devoid of information supporting the School
District's expectations to spend Note proceeds on projects. Weiss offered no explanation for his
preparation of a Non-Arbitrage Certificate with insufficient facts and no estimates, which
therefore failed to comply with Treasury regulations. Although Weiss twice asked for cost
estimates from Mento, none were provided to him. Mento's failure or refusal to provide cost
estimates for the projects should have prompted Weiss to question whether the School District
was ready to proceed with its projects and comply with the Treasury regulations. In the absence
of the requisite facts and estimates, the list of projects from Mento was merely a "wish" list and
could not be used as a basis for rendering an unqualified opinion.
4. Weiss accuses the Division of taking a "fraud by hindsight" approach, and seeking to
hold him liable for not being able to foresee that the IRS would declare interest on the Notes to
be taxable. In order that interest on the Notes be tax-exempt, Weiss was required to evaluate the
objective reasonableness of the School District's expectations to meet the expenditure, time, and
due diligence tests as of the issue date. Weiss's liability under antifraud provisions arises from
his negligence in his role of bond counsel, and not as a result of actions taken by the IRS after the
Notes were issued. 45/
Under Securities Act Section 8A(a), 46/ the Commission may order any person who is
violating, has violated, or is about to violate any Securities Act provisions to cease and desist
from committing or causing any violation or future violation of those provisions. In determining
the appropriateness of a cease-and-desist order, we look to the risk of future violations and other
factors, including the seriousness of the violation, the isolated or recurrent nature of the violation,
whether the violation is recent, the degree of harm to investors or the marketplace resulting from
the violation, the respondent's state of mind, the sincerity of assurances against future violations,
the respondent's recognition of the wrongful nature of the conduct, the respondent's opportunity
to commit future violations, and the remedial function to be served by the cease-and-desist order
45/ We reject Weiss's argument that the School District was "distracted" by "unforeseeable
events" which prevented it from moving forward on the projects. Most of those events
occurred after the School District issued the Notes. Under applicable Treasury
regulations, an issuer's reasonable expectations are determined as of the issue date of the
46/ 15 U.S.C. § 77h-1(a).
in the context of other sanctions sought in the proceeding. 47/ We impose a cease-and-desist
order only when we have determined that there is some risk of future violation. 48/
Weiss was responsible for misrepresentations and omissions in the Official Statement and
in his legal opinions which were made available to investors. Weiss's conduct caused harm to
investors who purchased the Notes because they were without full information concerning the
substantial risk that the IRS would find the Notes to be taxable. Weiss's conduct also caused
harm to the marketplace by eroding confidence in bond counsels' unqualified opinions. The
importance that investors place on such opinions cannot be overestimated. We have stated that
"[t]he smooth functioning of the securities markets will be subject to serious disruption if the
public cannot safely rely on the expertise proffered by lawyers rendering their opinions." 49/ As
we have found, Weiss was at least negligent. He appears not to acknowledge any wrongdoing.
Weiss, moreover, continues to practice in the area of municipal finance, and could give another
unqualified opinion in the future. We believe there is a sufficiently high level of risk of future
violations that would endanger the public. A cease-and-desist order is therefore warranted
against Weiss to protect the public. 50/
Under Securities Act Section 8A(e), the Commission may enter an order requiring
disgorgement, including reasonable interest. The remedy of disgorgement seeks to deprive the
wrongdoer of his ill-gotten gains. 51/ It returns the violator to where he would have been absent
the violative activity. An order to disgorge a certain amount need only be a reasonable
approximation of the profits causally connected to the violations. 52/ Once the Division shows
that its disgorgement figure reasonably approximates the amount of unjust enrichment, the
burden shifts to the respondent to demonstrate that the Division's figure is not a reasonable
47/ KPMG Peat Marwick LLP, 54 S.E.C. 1135, 1192 (2001), reconsideration denied,
Exchange Act Rel. No. 44050 (Mar. 8, 2001), 74 SEC Docket 1351, petition for review
denied, 289 F.3d 109 (D. C. Cir. 2002).
48/ 54 S.E.C. at 1185. The risk of future violations required to support a cease-and-desist
order is significantly less than that required for an injunction. Id. at 1191.
49/ Attorney's Conduct in Issuing an Opinion Letter, Exchange Act Rel. No. 17831 (June 1,
1981), 22 SEC Docket at 1202.
50/ We decline the Division's invitation to impose, for a five-year period, certain specified
preconditions on Weiss's issuance of written opinions. We do not find such conditions to
be necessary here in order to achieve compliance with the securities laws.
51/ See SEC v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1230-32 (D.C. Cir. 1989).
52/ Id. at 1231.
approximation. 53/ Any risk of uncertainty as to that amount falls on the wrongdoer whose
illegal conduct created the uncertainty. 54/
The Division has established that Weiss received $9,509.63 for his work relating to the
transaction. The Division also has established that this figure was causally connected to Weiss's
wrongdoing because it represented his fee for his negligently rendered services as bond counsel.
The Division's showing has presumptively satisfied its burden of proof. Weiss has not argued or
shown that the $9,509.63 figure is an unreasonable approximation of his unjust enrichment. We
will order Weiss to disgorge $9,509.63, plus prejudgment interest.
An appropriate order will issue. 55/
By the Commission (Chairman COX and Commissioners ATKINS, CAMPOS, and
NAZARETH); Commissioner GLASSMAN dissenting.
Jonathan G. Katz
53/ SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996); SEC v. Patel, 61 F.3d 137, 140 (2d Cir.
54/ First City Fin. Corp., 890 F.2d at 1232.
55/ We have considered all of the parties' contentions. We have rejected or sustained them to
the extent that they are inconsistent or in accord with the views expressed in this opinion.
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Rel. No. 8641 / December 2, 2005
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 52875 / December 2, 2005
Admin. Proc. File No. 3-11462
In the Matter of
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Ira Weiss cease and desist from committing or causing any violations or
future violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act of 1933; and it is further
ORDERED that Ira Weiss disgorge the amount of $9,509.63, plus prejudgment interest,
as calculated in accordance with Commission Rule of Practice 600(b).
Weiss's payment of disgorgement shall be: (i) made by United States postal money order,
certified check, bank cashier's check, or bank money order made payable to the Securities and
Exchange Commission; (ii) delivered by hand or courier to the Office of Financial Management,
Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3,
Alexandria, Virginia 22312, within thirty days of the date of this order; and (iii) submitted under
cover letter which identifies Weiss as the respondent in this proceeding and gives the file number
of this proceeding. A copy of the cover letter and check shall be sent to Mark Zehner, Esq.,
Philadelphia District Office, Division of Enforcement, 701 Market Street, Suite 2000,
Philadelphia, Pennsylvania 19106.
By the Commission.
Jonathan G. Katz